Company A manufactures a product that is available in both a Deluxe model and a Regular model. The company has manufactured the Regular model for years. The Deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the Deluxe model, the companys profits have steadily declined and management has become increasingly concerned about the accuracy of its product costing system. Sales of the Deluxe model have been increasing rapidly.

Manufacturing overhead is allocated to products on the basis of direct labor hours. For the upcoming year, the company has estimated that it will incur $900,000 in manufacturing overhead cost and produce 5,000 units of the Deluxe model and 40,000 units of the Regular model. The Deluxe model requires two hours of direct labor time per unit, and the Regular requires one hour. Material and labor costs per unit are as follows:

MODEL

Deluxe Regular

Direct Materials $40 $25

Direct Labor $14 $7

Required:

Using direct labor hours as the base for allocating overhead costs to products, determine the cost per unit for each model and the total gross margin for each product for the upcoming year. The companys pricing policy is cost plus 40%.